Help with Expected Net Present Value

[bbtb]

I tried the basic NPV in excel but am confused I know this is long but could someone please help!!

-Acme will invest $8 million in the proposed joint venture project, which will help to finance Jone's (in Brazil) production using the newly patented process. The Brazilian government has guaranteed that the after-tax profits (denominated in Reals, the Brazilian currency) can be converted to US dollars at the current exchange rate and sent to the Gibson Company each year. Current exchange rate is 1 US Dollar = 2.26250 Brazilian Real
1 Brazilian Real (BRL) = 0.44199 US Dollar (USD).

For each of the first five years, 60 percent of the total profits will be distributed to Jone's, while the remaining 40 percent will be converted to dollars to be sent to Acme.
The income tax rate for the joint venture will be 10%. However, the Brazilian government is considering raising the income tax rate to 30%.
At the present time, the Brazilian government does not impose a separate income tax on profits sent out of the country. However, the Brazilian government is considering imposing an additional 10 percent income tax on profits distributed to a foreign company.
Assume that there are no other forms of tax. After considering the taxes paid in Brazil, assume an additional seven percent tax imposed by the US government on profits received by Acme Company.

The expected total profits resulting from the joint venture per year are as follows:


Year Total Profits from Joint Venture (in BRL)
1 40 million
2 60 million
3 70 million
4 90 million
5 120 million

Acme's average cost of debt is 6 percent before taxes. Its average cost of equity is 9 percent. Assume that Acme’s US income tax rate is 10 percent. Acme’s capital structure is 70 percent debt and 30 percent equity. Acme adds between 2 and 5 percentage points to its cost of capital when deriving its required rate of return on international joint ventures. Acme plans to account for country and other risks within its cash flow estimates.


*Determine the discrete probability distribution of Acme's Net Present Value for this joint venture and calculate the Expected Net Present Value.

 

[Tazguy37]

Welcome to MrExcel Board!

What steps have you taken to solve this problem; do you have a sample worksheet to show us?

but am confused

What part are you getting confused on?

 

[bbtb]

I haven't done much. I found the conversion rate and tried plugging some of the numbers in the NPV formula but there are too many numbers left out of the equation. Any suggestions??

 

[brettdj]

Why don't you try setting this problem up, layout the cashflows, WACC calculation etc and then come back to us for comment

. Acme adds between 2 and 5 percentage points to its cost of capital when deriving its required rate of return on international joint ventures. Acme plans to account for country and other risks within its cash flow estimates.

That doesn't make much sense

I realise that this is an example problem but adding a penalty on international joint ventures isn't the way most evaluators would do it. The international risk is caught by coutry risk if applicable - I can't see the relevance of the JV structure on cost of capital. And conversley, country risk can't be taken into account in the cashflows. Typically country risk is calculated from the sovereign bond spreards.

Cheers

Dave

 

[bbtb]

I am not too familiar with this. How would I do that?

 

[brettdj]

This isn't really an Excel question, it is a finance problem

I'm not sure what the MrExcel position is on helping with study questions.

But at a bare miniumum you should have enough background and knowledge to get started on laying this problem out, rather than looking for a complete solution here.